China and the World of Business • China Business and the World

Just finished my panel at CASBAA 2008 on “Strategies for a Post-Olympic China.” It’s humbling to be on a stage with people like Gehua Senior V-P Li Danyang, Terry Mak from Celestial Pictures, Peter Schloss from BroadWebAsia, Paul Wang of CSM, and to have Cosmedia Group CEO Tony Tse moderate. These may not be household names, but they should be, because each of them has helped lay the foundation for China’s media future by building companies that are testing the edge of what is politically acceptable and commercially viable.

But enough gushing.

We have seen the future, and it is Youku

We were all positive about the prospects for online video companies like Tudou and Youku in China, and not just because the issue of SARFT licenses has been so recently cleared up. What I said I though was exciting about online video is that the medium actually offers the first viable opening for foreign film and television into China on something other than constricted official channels or on pirated DVD. If the video site owners are smart, as their revenues begin to grow, they will cut deals with content owners. Content owners, for their part, will cut deals (probably revenue sharing) with the video sites.

Peter Shloss, whose company is actually deeply invested in one such site, told the audience “I’m ready to license now.”

The audience, clearly moved (or taken aback) by our passion and relative unanimity, used their wireless voting devices to confirm that they saw online video as the most interesting media opportunity in China in the coming three years.

All good stuff. Very exciting. A win for all. Mostly. Because all of this is predicated on three issues:

1. Perfecting the advertising model with better measurement and business models tweaked to prevent things like click fraud; or finding another approach;

2. Convincing the content owners that this is a wise thing for them to do with their expensive programming;

And the one I kicked in:

3. Managing the eventual showdown with traditional broadcasters. Because the reckoning is coming, and it is coming right soon.

Gunfight at the Tudou Corral

Up until now, neither the government nor the broadcasters have seen new media generally and online video in particular as a threat to the traditional TV business in China. Revenues have been small, television ad income has continued to grow, and the people watching those videos had little spending power. Let them have their little games, the broadcasters seemed to say, we have Real Business to do.

But there is another meme growing quietly in the wings of this conference, and Paul Wang hinted at it during our panel. The Annual CCTV advertising auction is coming in two weeks, and three people I have spoken to in the last 24 hours all agree that this auction will break CCTV’s winning streak. If this year’s take (for 2009) beats last year’s (for 2008), it won’t be by much. Whether it’s the post-Olympic hangover, a growing fear, uncertainty, and doubt spurting forth from the world’s financial markets, or something more fundamental and tectonic is the only question.

My bet is on the “fundamental and tectonic.” Which takes us to online video.

The most interesting part of the semi-annual CNNIC report is not the big headline number of how many Internet users China has, but the demographic profiles of those people. For a long time, the overwhelming majority of regular Internet users in the PRC have been of university age or younger, and they didn’t have much to spend. But recent reports from CNNIC make it clear that this is slowly starting to change. As those people who used the Internet growing up are graduating from college, getting jobs, and looking for ways to spend their loose change, the “Internet generation” is turning into a very interesting target audience for a lot of advertisers, and not just the ones selling computer gear.

This demographic shift is happening at a time when many advertisers – including but not limited to the multinational corporations – are starting to worry about what they are getting for their money. Add to this picture the curtain of fiscal conservatism that is descending on marketing officers as a result of the global financial crisis, and suddenly advertising on television no longer looks like the automatic slam-dunk it did at the height of the Olympics.

Here is my scenario: either this year, next year, or in 2010 the results of the CCTV advertising auction are bad – so bad that they cannot be hidden. We’re talking like a 10-15% decline, or maybe worse. Meantime, Youku, Tudou, et al are starting to rake it in. They’ve concluded content licensing deals, they’ve fixed (or kind of fixed) the measurement issues, and there are upwards of 300 million users online.

At that point, it is not going to take long for CCTV and its fellow broadcasters throughout China to add things up. They will turn to the State Administration for Radio, Film and Television and to the Publicity (propaganda) Committee of the Party, making the case that these private online companies are not only hurting their business, but, worse, doing damage to the ability of broadcasters to serve their propaganda/social administration function for the state.

At that point, the government’s options become fairly clear: restrict the online video sites, let the broadcasters run whatever content they want, or force some kind of accommodation between the two sides (i.e., compel each of the sites to take on a state broadcaster as a part or majority shareholder.)

Don’t Go Down that Dusty Street

China’s broadcasters wield tremendous political power, (for all the expected reasons and for many others that we won’t go into here,) and they will not go gently into a future where they cater primarily to people who cannot afford an Internet connection. There is just not enough money in it.

The wise thing to do for the online video companies is to recognize – right now – the danger implicit in their own success, and start working to prevent that showdown. But I’m not optimistic. These companies are so focused on the plentiful immediate challenges to their prosperity and existence that they can’t worry about an over-the-horizon threat.

On the other hand, that’s exactly what Boards of Directors are supposed to be for. Once they get done lecturing their management about how important it is to make money, the next topic on the list should be about how to avoid getting sat on.